PACC Committee Meeting

STANDING COMMITTEE ON PUBLIC ACCOUNTS

COMITÉ PERMANENT DES COMPTES PUBLICS

EVIDENCE

[Recorded by Electronic Apparatus]

Friday, October 20, 2000

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[English]

The Vice-Chair (Mr. Steve Mahoney (Mississauga West, Lib.)): I'd like to call to order this meeting of the public accounts committee.

I want to tell everyone that we are live on Newsworld.

I also would like to read an official notice, if I can: “That, notwithstanding any Standing Order or the usual practice, the Standing Committee on Public Accounts meet at 12:30 p.m. this day for the purpose of hearing evidence from the Auditor General of Canada; that if the Chair or Vice-Chairs of the Committee are not present”—and at least the vice-chairs are—“the Committee may choose any other Member to be Acting Chair of the meeting; and that the Committee be authorized to broadcast its proceedings.”

Mr. Desautels, let me welcome you and your staff to this committee. We appreciate you taking the time to be here, and we look forward to your report. I would add, on behalf of all members, that we regret the confusion that occurred yesterday, but we believe we should move on with the very important questions that all members on both sides would like to ask you after you have given your presentation. I would invite you to begin.

Mr. L. Denis Desautels (Auditor General of Canada): Thank you very much, Mr. Chairman. We are pleased to be able to meet with the committee now and to discuss the report we tabled on Tuesday as well as the suggested priorities for the committee's consideration.

I fully realize that an election call is forthcoming and that this committee will be reconstituted in the next Parliament. However, it's my hope that this discussion on priorities will be of assistance to the next public accounts committee when it considers its future business.

It has been difficult for me to keep the priority list short for this report because it includes many serious matters that merit parliamentary attention. You'll note that chapter 12, “Ethics and Values”, and chapter 13, “Financial Management Capabilities”, are not included as priorities, but I consider them of equal importance to the other chapters. In fact, they're fundamental to good governance. In both cases strong leadership at the highest levels and sustained effort are required.

[Translation]

With deregulation, downsizing, contracting out and partnership with the private sector, the government increasingly relies on a strong foundation of values and ethics, more than on detailed rules and procedures, to make decisions in the public interest.

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The government is taking steps to maintain sound values and ethics, but most of these measures are limited or in their preliminary stages. There is a need to act faster, more decisively to put in place all the elements of a solid framework for values and ethics in the federal public sector.

Also, the challenges to be met in improving financial management are substantial. I am concerned that so few of the departments we examined have the basic financial management capability they need to date, let alone for the future. Departments are only at the initial stages of developing the capabilities needed to meet the requirements of the Financial Information Strategy and the Modernization of Comptrollership Initiative.

We hope that the committee will be able to monitor these initiatives over the medium term.

Turning now to the five suggested priorities, I will start with the first chapter in the report.

[English]

Chapter 10 looks at how Transport Canada handled the transfers of Canada's 18 largest and busiest airports between 1992 and 1999. Under the transfer agreements, Transport Canada retains ownership of the airports but leases out their management, operation, and development to bodies known as airport authorities. Airport transfers represent billions of dollars in airport revenues and other business opportunities.

The audit found significant flaws in the financial analysis supporting the transfer deals. As a result, the quality of information used to decide on such things as rent has been considerably impaired. For example, the department did not gather information on the fair market value of the airport businesses it was transferring before it negotiated second-round transfers or before any renegotiation. Further, the department could not demonstrate how the deals for all of the transferred airports were equitable, uniform, consistent, and fair one with the other, as the government had directed. Also, Transport Canada has yet to define its post-transfer role. The department has failed to properly monitor the growing use of airport improvement fees, sole-source contracting at major airports, and activities of subsidiaries in order to ensure that the interests of the public are protected.

I would like to make it very clear that we are not criticizing the airport transfer policy. Transport Canada indeed knows that there are a number of positive aspects to the arrangements. However, we believe there is a pressing need for Transport Canada to demonstrate more diligence in its handling and oversight of airport transfers. I'm also disturbed that the evaluation work on airport transfers that was to have been completed in 1998 is still ongoing, despite significant government and other stakeholder interests.

Chapter 11 deals with the management of grants and contributions at Human Resources Development Canada. The department spent about $3 billion in 1999-2000 on grants and contributions for programs such as job creation and youth employment and for employment benefits and support measures authorized under the Employment Insurance Act. Of about 40 grants and contributions programs run by HRDC, our audit examined the management of four up to December 1999: the Transitional Jobs Fund and its successor, the Canada Jobs Fund; Youth Internship Canada; Social Development Partnerships; and the sectoral partnership initiative.

We found widespread problems in all key areas of all the programs we examined. We found that controls had broken down, putting public funds at unacceptable risk. Mr. Chairman, I'd like to make note of the fact that notwithstanding the serious nature of the problems we identified, we found no evidence of fraud or malfeasance on the part of HRDC officers.

The proper management of grants and contributions is an essential part of good public administration in the federal government. There are large amounts of public funds involved and they should be spent only with great care and appropriate levels of control.

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I find our audit observations of HRDC disturbing in light of good public administration principles. Our work confirmed the findings of the department's 1999 internal audit, and more. We found breaches of authority, improper payments, limited monitoring, and approvals that had not followed established procedures. We also found problems in the design of these programs and in the measurement and reporting of results. All of this is serious because taxpayers have a right to expect that the government follow due process in spending public funds.

Current management in the department is committed to addressing the serious weaknesses in the matter of grants and contributions. Their actions and plans address all the significant deficiencies we found in our audit. However, sustained effort is required. Beyond the immediate corrective action, HRDC needs to fundamentally change its day-to-day approach to the delivery of grants and contributions.

[Translation]

Mr. Chairman, Chapter 14 focusses on how CIDA's Geographic Branches and the Canadian Partnership Branch manage contracting and contribution agreements for around $1 billion annually in goods and services. The rules for selecting third parties to deliver development assistance projects using contributions are not clear. They give the agency too much flexibility. Particularly, they allow the use of contribution agreements in a way that often varies from CIDA's internal policies.

Although we noted some cases of non-compliance with policy and regulations on contracting, we found that when CIDA resorted to competitive contracts, it generally handled the process properly. However, CIDA's use of contribution agreements instead of competitive contracts needs further review. Some of these agreements became, in effect, the same as sole-source contracts that would not be permitted under Government Contract Regulations. The terms and conditions for grants and contributions under Geographic Programs are very general, and they provide no direction on how and when to use contribution agreements.

CIDA needs to tighten its policies, guidelines and procedures for sound management of its contracts and contribution agreements if it wants to ensure the fairness and transparency of its selection of third parties to deliver aid-assistance projects. The upcoming five-year review of CIDA's terms and conditions for grants and contributions is an excellent opportunity to address this matter.

[English]

Chapter 15 revisits our 1997 chapter on first nations health. The public accounts committee issued a report to the House on this topic in February 1998. Although Health Canada has acted on the recommendations, I'm concerned that it has not made enough progress to fix many of the problems identified in 1997. The point-of-service system for the administration of pharmacy benefits is now fully operational. However, the department has not adequately monitored pharmacists' overrides of the warning messages generated by the system. Clients are still accessing large amounts of prescription drugs. In addition, Health Canada has been slow to develop an appropriate strategy for on-site audits of pharmacies and dental care providers. The department has also made limited progress towards ensuring that it receives the reports that are required under contribution agreements.

Community health plans are still not being updated when transfer agreements are renewed, and requirements for audits, annual reports, and evaluations are often not met.

Improving the health of our first nations is a complex task. The programs Health Canada delivers, either directly or in partnership with first nations organizations, represent a key component of this task. Health Canada needs to fulfil its responsibilities in a way that helps first nations establish programs and services that are likely to improve their health.

Finally, Mr. Chairman, the audit observation on Downsview Park Inc. describes the development of a park on land no longer required by National Defence as a result of the closure of CFB Toronto at Downsview. Normally when land is no longer needed for program purposes it is declared surplus and sold. The proceeds from the sale are returned to the consolidated revenue fund. Through the estimates process Parliament then votes on its program priorities and appropriates money from the CRF. This process is intended to ensure that Parliament controls new programs and spending.

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Parliament has not provided clear and explicit authority for the creation and operation of an urban park, nor has it authorized the planned related spending of over $100 million of public funds.

As you can see, Mr. Chairman, all of these matters are serious in nature. I hope that all of the chapters in the October report will be of interest to your committee.

I thank you. This completes my opening statement. My colleagues and I would be very happy to respond to your questions.

The Vice-Chair (Mr. Steve Mahoney): Thank you very much, Mr. Desautels.

Just for the purpose of those who are not normally at this committee, our process is that we have eight-minute rounds, beginning with the opposition, and then four-minute questioning rounds after that. The normal time allotted for this type of a process, this type of a report and question and answer session, would be about an hour and a half. I'm not saying we'll be that strict, but that's the goal I'm going to be working toward, with the cooperation of all members.

We'll begin our questioning with Mr. Day.

[Translation]

Mr. Stockwell Day (Okanagan—Coquihalla, Canadian Alliance): Thank you, Mr. Chairman, and thank you, Mr. Desautels. I would like to thank you on behalf of the Canadian Alliance and all Canadians, because your work is extremely important. What you do is far from easy, and we can understand that the government would not necessarily be happy with a report like this.

[English]

Having been a finance minister for a number of years, I know with what breathless anticipation a government waits for an auditor general's report, and we in government have usually not rushed with joy to embrace it. I will say, however, that the work is important. My previous experience in government has been that the public is best served when the government takes the report, advises the ministers, and gets to work in the particular areas where it is necessary.

The first item I'd like to address, from a personal point to you, sir, is I understand that before the 1997 election there was a mix-up of rooms and people did not show up. That is what we're hearing. I don't know if that can be clarified or not. My main concern is with what happened yesterday and that your office continue to be given the respect it is due. I'd just like to know if you have received an official apology—not an expression of regret, as we heard today, but an official apology for what happened yesterday so there's no mistaking in the public mind that we respect the work you do.

Mr. Denis Desautels: Mr. Chairman, first of all, I'd like to thank Mr. Day for his encouraging comments.

In response to his specific question, I will say yes, I have received telephone calls from the Honourable Don Boudria, as well as the Liberal Party whip, Mr. Kilger, last night and again this morning.

Mr. Stockwell Day: Thank you for that.

The areas that are important, if I could just give the questions.... In terms of the timeline, is it part of the process that if you don't have time within that allotted that you, sir, or your officials respond back in writing to questions that go unanswered? Is that part of the process?

The Vice-Chair (Mr. Steve Mahoney): They would do that, I'm sure.

Mr. Denis Desautels: Mr. Chairman, we normally succeed in answering most of the questions on the spot. If the member asks a question for which we can't provide the details, that's followed up. Hopefully, that does not happen very often.

Mr. Stockwell Day: I appreciate that. Thank you.

Item number 14 on the report you just gave, sir, talks about “widespread problems in all key areas and all of the programs that we examined”. Again, going from my experience of being audited by an auditor general, there are always areas in which a government is called to task to improve. That's fairly common, and that's your job. In my review of auditors general reports, I have never seen such a widespread indictment, saying “all key areas and all of the programs that we examined”. Just on an historical note, if you have heard of the nature of that before—

Ms. Beth Phinney (Hamilton Mountain, Lib.): On a point of order, particularly because this is a public meeting, I'd like it to be clear, because the honourable member did not mention it, that this is under the Department of Human Resources Development, not all of the things in the report. You're talking about this one section.

The Vice-Chair (Mr. Steve Mahoney): That's fine. It's not really a point of order, but we'll add your time back in.

Mr. Stockwell Day: Thanks very much.

I'll just hand the questions out, sir, and you can comment on whatever you feel capable of addressing within the time limit.

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It was found that the controls had broken down. Perhaps you could reflect on how that could happen to such an extent. Obviously there must have been controls at one point. Perhaps you could advise us on what could be done for the future so that controls could not break down to such an extent as they did.

In item 17 there's a reflection that there needs to be fundamental change in the day-to-day approach to the delivery of grants and contributions.

You properly note in point 22 that there's still work to be done on references you made to Health Canada as long as three years ago. I would ask your guidance again. When there seems to be a three-year pause and not the type of action that should be taken, do you have any kind of assurance from what you've been told in your present reporting that in fact these things will take place? Quite properly, you report on Health Canada not moving in some areas as you would have hoped.

You've also commented significantly on the area of ethics and values. I find that to be a very positive approach. Again, it's something you don't often see reflected in an auditor general's report. I'd be interested in any thoughts you may have.

You've properly indicated that the public service itself, in the vast majority of cases, operates with integrity and with a desire to get the job done properly. That has been my experience in dealing with the public service in those vast majority of cases. So there seems to be a reflection that there is some sense for the establishment of a clear code of values and ethics for people, the elected people possibly, dealing with public servants. I don't want to read something into it that isn't there, but perhaps you could reflect on the need for values and ethics.

As a final question, it has been reflected that somewhere there is a code of conduct for federal public servants but that in fact it is a secret code that is not available or public. Would you think that a code of conduct for ministers is advisable? Do you see a danger to something like that being made public?

I realize that those questions cover a variety of matters.

I appreciate that you've also reflected on the mismanagement of funds and misleading financial information, which is a very sobering reflection. To what degree have generally accepted accounting principles been applied, from what you have seen, in terms of the distribution of these grants and various other monetary controls that should be in place?

I realize that is a series of questions, sir, and—

The Vice-Chair (Mr. Steve Mahoney): Ultimately, there are two minutes left in the session to respond to all of that, if you could.

Mr. Denis Desautels: Mr. Chairman, I'll do my very best.

I've identified at least five questions from Mr. Day. I think the first one dealt with the significance of the problem we have identified.

I said on previous occasions, Mr. Chairman, that we have looked at different grants and contributions programs for quite a number of years. Particularly in the 1990s, since I've been Auditor General, we have looked at a number of programs and have found similar problems in most grants and contributions programs across government. I've also said, though, that the situation we found at HRDC in 1999, which was identified before us by the internal audit people, was much worse than what we had found in other departments. So in terms of levels of significance, it is more serious than what we had found in previous audits of other departments.

You asked me to comment on the controls breakdown and how we can prevent that from happening in the future. If members would have a look at the chapters we have on both ethics and values and the financial management capabilities of government, I think you'll find an indication there as to what should be in place in the longer term for preventing that kind of situation from happening. Part of the problem at HRDC, of course, is that on the value side there was an imbalance between, on the one hand, rapid service to the public, or clients, as they're called, and the need to spend money following due process. This got out of kilter. I think that with proper financial management systems, the proper culture, as well as the right values, there's less chance that this could happen again.

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Mr. Day also asked me about Health Canada and if we had any assurance that the problems we raised there were being taken care of. I can tell the committee that we've had positive responses from the department. We were also encouraged that on the day we tabled our report the department and the minister posted on their Internet site a full response to our report and to our recommendations, basically undertaking to deal in a fairly prompt manner with the issues we raised.

So I feel generally confident that our message has been well received and will be acted upon. I am also counting on the fact that this committee has also looked at these issues in the past, and will no doubt be interested in the future to revisit those.

Mr. Day also asked me about ethics and values, or the need for a code and to whom it would apply. I think our message here, Mr. Chairman, is that there is at the present time a very strong base of ethics in the federal government. I've said in my report and on other occasions that the ethics in the federal Government of Canada compare very favourably with those of other governments in Canada and around the rest of the world. However, we should not take anything for granted. We need to put in place a complete comprehensive framework that would apply to everybody in what I call the federal public sector. That would not include only public servants, but other people who interact with public servants. These would be not only elected officials, but also people who contract with government, who carry out work on behalf of government.

Yes, I think there's a need for a comprehensive framework that will cover all the bases. The sooner we can have that in the place, I think the better it would be.

I think those are the main points.

The Vice-Chair (Mr. Steve Mahoney): You've been very generous. Have you covered everything, do you feel?

Mr. Denis Desautels: I think so, Mr. Chairman.

The Vice-Chair (Mr. Steve Mahoney): Thank you very much.

Monsieur Sauvageau.

[Translation]

Mr. Benoît Sauvageau (Repentigny, BQ): Mr. Mahoney, I recognize your legendary sense of justice and fairness. I am therefore convinced that you will give me as much time as you gave Mr. Day. I should therefore have about 10 or 12 minutes.

Once again, I would like to welcome Mr. Desautels and his associates among us today. I would also like to extend a special warm welcome to our Liberal colleagues, who likely resorted to the parliamentary guide service to find this room. Welcome to the meeting. It is a pleasure to see you here today.

Mr. Desautels, it was very important, at least for the opposition members, to see you today. It would have been nice to have seen and heard you yesterday, but we were only able to see you. Today, we will also hear from you and that is very important because the work that you do will hopefully allow us to improve the administration of public funds.

I will be asking you some direct questions and I would appreciate it if you could answer just as directly. I will be bringing up some of the cases that you mentioned in your report and then I will ask you what you thought of one of the Prime Minister's statements.

More than anything else, it mentions HRDC. This is the case for my first example. You mentioned the case of Cochran Entertainment Inc., which received a letter in March 1998, from the minister at the time, Mr. Pettigrew, in which he confirmed a grant of $2.5 million that had not been given approval by HRDC.

Further on in your report, you said this with respect to Chelson's Distribution Ltd.:

When it came time for approval, the amount of the contribution was increased above what was recommended by HRDC representatives, without explanation.

Further on in your report you mention the Auberge des Gouverneurs, located in the prime minister's riding. You state that a grant of $600,000 was announced before being authorized by HRDC representatives and that the project did not create the number of jobs anticipated.

Further on in your report, you mention the 1999 Brott Music Festival in Ms. Copps' riding. She had personally written to the HRDC minister for a grant. This took place in Hamilton in 1999.

Later still, you mention Transelec. During your next audit, you could analyze the Claude Gauthier program, because there seems to be a Claude Gauthier program at HRDC. Mr. Gauthier was awarded a grant even though he did not comply with the standards and rules.

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Later in your report, you mention the Groupe SM which gave $90,000 to the federal government over five years and obtained a contract despite the fact that they did not comply with the standards.

Lastly, you also mention Placeteco, the now infamous case, a concern which is also owned by Claude Gauthier.

All of this to ask you if you agree with the Right Honourable Prime Minister, who said on October 18 during Question Period that in his report, the Auditor General mentioned that he had not detected any mistakes on the part of anyone within the public service. We, members and ministers, are part of the administration of the public service. He clearly stated that no mistakes had been committed by politicians or public officials in all of these files. Do you agree with this statement by the Prime Minister?

Mr. Denis Desautels: Mr. Chairman, I can only repeat what I said in the report or in other circumstances. As I mentioned this morning we found no cases of wrongdoing or fraud by any representatives of the department in question. I'm speaking now of HRDC.

I would like to correct what I just said before going any further. The same cannot be said with respect to those who applied for grants, as we all know that some of these persons are currently under investigation. Therefore, the same thing cannot be said of some of the recipients of these programs.

Except for the examples that you have mentioned, we did not note in our work enough participation by politicians to be able to draw the same conclusion about them. In our report, we simply described certain cases in which normal procedures were not followed and where the minister in question intervened.

Mr. Benoît Sauvageau: It is possible to say that there may have been misguided actions?

Mr. Denis Desautels: I have also repeatedly said that in those cases, even if normal procedures were not followed, it does not mean that the minister had no right to intervene. I believe that the minister responsible for HRDC has the right to intervene. The minister even has the right to overrule his or her officials or make a decision that goes against what they have suggested. However, I said that when such decisions are made, it is preferable to guarantee as much transparency as possible so that the reason given by the minister to justify the decision is known and understood by everyone. So I would repeat that in all of our work, we have not found any cases of fraud or wrongdoing on the part of HRDC employees or officials.

Mr. Benoît Sauvageau: In the cases of Placeteco and Transelec, which did not meet any of the basic selection criteria, if you did find irregularities, would your mandate allow you to investigate in order to prove that there were irregularities, or, as auditor, are you limited to an audit role, leaving it up to the investigators to look into wether there has been any criminal or illegal activity? Is it within your mandate to prove that?

Mr. Denis Desautels: Mr. Chairman, if our work revealed evidence or indications that led us to believe that there may have been illegal or even criminal acts committed, we would have a duty to ensure that the matter was investigated. In such a case, however, we would contact the RCMP to carry out the investigation.

Mr. Benoît Sauvageau: Do you agree that in the Transelec case, everything was completely in order, the way it was described in your report, as the Prime Minister said? I will read a Hansard extract from October 18, 2000, where the Prime Minister said:

Right now, the Auditor general has said that, in the case of Transelec, everything is completely in order.

In your opinion, is everything in order in the Transelec case?

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Mr. Denis Desautels: Mr. Chairman, as we say here, we found two shortcomings in the Transelec file. In our opinion, the department should have simply refused their application at the outset and sent them away. So...

Mr. Benoît Sauvageau: And the owner of Transelec...

Mr. Denis Desautels: There is something not right if the application was accepted initially when it dit not meet the criteria.

Mr. Benoît Sauvageau: And the owner is in fact Claude Gauthier, who also owns Placeteco. Is that not right?

Mr. Denis Desautels: Mr. Chairman, ownership of the company changed over the years. When the application from Transelec was received, the majority shareholders in the company were not Canadian. However, the percentage of shares owned by various people changed after that.

Mr. Benoît Sauvageau: Thank you.

[English]

The Vice-Chair (Mr. Steve Mahoney): Thank you very much.

Madame Jennings.

[Translation]

Ms. Marlene Jennings (Notre-Dame-de-Grâce—Lachine, Lib.): Thank you, Mr. Chairman.

Mr. Desautels, I am always pleased to be here at the committee when you appear before us.

You know that I have looked at all your reports and that I am quite pleased with the quality of the work that you do. I have a few questions to ask you and I will try to be brief to give you more time to answer.

In the last few months, many questions have been asked in the House about HRDC, about its financial management, about a number of its programs, and so on. In recent weeks, and above all, in the last few days, since your reports were released, the opposition has been saying that HRDC reviewed only 76 files. However, in reading the report, I see that, in paragraphs 11.66 and 11.69, you say that HRDC reviewed all the 17,000 active files. Is that right?

Mr. Denis Desautels: Mr. Chairman, I will ask Ms. Barrados to answer that question.

[English]

Ms. Maria Barrados (Assistant Auditor General, Office of the Auditor General of Canada): There are two different things that occurred. The department reviewed all the active files to make sure the required paperwork was in place to make payment. So that was all the files.

[Translation]

Ms. Marlene Jennings: If I understand correctly, all the active files, of which there were approximately 17,000, were in fact verified by the department.

[English]

Ms. Maria Barrados: It was all those files, because they had stopped payment to ensure that they could continue to make payments. But the nature of the problems we identified were broader than that.

[Translation]

Ms. Marlene Jennings: I see.

[English]

Ms. Maria Barrados: It was the 76 that related to the broader review. So there were two different things that occurred.

[Translation]

Ms. Marlene Jennings: So, an audit was done of all the 17,000 active files and another type of audit was done of the 76 files.

[English]

Ms. Maria Barrados: I would not use the words “audit verification”; I would use the words—

[Translation]

Ms. Marlene Jennings: A review.

[English]

Ms. Maria Barrados: —of the department in terms of stopping the payments, ensuring that they could continue the payments, but doing a more thorough review of the 76.

[Translation]

Ms. Marlene Jennings: Thank you.

Just this week we discussed the chapter regarding financial management capacity. We spoke of the importance of the minister and deputy minister showing determination and leadership in making the necessary changes when there is a basic problem affecting the entire department. You and I, Mr. Desautels, talked about the leadership that Treasury Board demonstrated in dealing with the Y2K bug. It was not until the ministers and deputy ministers took the issue seriously that all the federal departments, agencies and services really came to understand the problem and take the necessary corrective measures. The outcome was very positive. We discussed all that.

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Past experience therefore shows that, once the government, ministers and deputy ministers are intent on making a change, the change can be effected. We know that the Human Resources Development Minister has already publicly stated that she intends to bring about the changes required to ensure that her department has proper financial management. Given the work that the people within her department have already completed under her orders—I am thinking of the action plan, and so on—do you think that the minister will implement the necessary changes, that she has the will to do it?

Mr. Denis Desautels: Mr. Chairman, I will attempt to be fairly brief. We have found that, across the government, financial management capacity is relatively weak. Although some interesting initiatives have already been put in place, there remains much to be done before reaching the goal. That is why a sustained effort will be required. As Ms. Jennings said, Treasury Board has a particularly important role to play in this, and we hope that, in this area, it will play a role similar to the one it played in dealing with the problem of the Y2K bug.

If we turn now to HRDC, we see that the program set up by HRDC to solve the problems that we have all noted is a thorough and responsible one. The resources and energy that the department has put into carrying out this program of corrective measures since the beginning of the year are also very commendable, and we have said this several times. If the department keeps this up, it will solve the problems in the end. But it will require a sustained effort. We hope that there will be a sustained effort. Since I first took up this position, I have seen many changes in HRDC leadership, at the level of both the minister and the deputy minister. The department is therefore going to need stability for some time in order to complete the work that has begun.

Ms. Marlene Jennings: Thank you. Good governance in the various departments, agencies and bodies of the federal government requires two things: first, values and ethics, and second, financial management capabilities.

If I am not mistaken, you have been auditor general for 10 years. You have had to audit many programs in many departments many times. Last fall, a problematic situation was discovered at Human Resources Development; you did an audit, and the minister concerned, Ms. Stewart, took action when weaknesses in the department's financial management capabilities were identified as one of the problems. Do you believe that the plan and corrective action taken—which, as you say, are comprehensive—are likely to settle the whole issue of financial management capabilities? If not, where is the deficiency? Is there a lack of financial resources to meet this goal? Is there a lack of human resources?

[English]

The Vice-Chair (Mr. Steve Mahoney): Thanks for those questions. Perhaps a brief answer and then we'll move on.

[Translation]

Ms. Marlene Jennings: Thank you.

Mr. Denis Desautels: Mr. Chairman...

[English]

A voice: [Inaudible—Editor].

The Vice-Chair (Mr. Steve Mahoney): We'll let the Auditor General answer, if you don't mind.

Go ahead, sir.

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[Translation]

Mr. Denis Desautels: Thank you, Mr. Chairman. The corrective action taken by the department deals specifically with the department's grants and contributions programs and all those programs can be managed better in the future. The action is comprehensive and should, as I said before, eventually solve the problem. However, when we are talking about financial management capabilities, it goes even further than that. So, we hope that in addition to a more specific program dealing with grants and contributions, the department will manage to set up the modern control system currently recommended by Treasury Board.

The Vice-Chairman (Mr. Steve Mahoney): Thank you.

Mr. Godin.

Mr. Yvon Godin (Acadie—Bathurst, NDP): Thank you, Mr. Chairman. First, I would like to welcome the Auditor General. For the second time, he has found the meeting room.

[English]

I would like to raise a question about Scotia Rainbow. One of the grants they gave to Scotia Rainbow right at the beginning was $650,000, and six months after it became $2 million. I am sure you're aware of that case. I'd like to hear your comments on it. I know you're saying that you didn't find any fraud, you didn't find anything here, but it's quite a bit of a jump when it's about $1.4 million and the way it was done and all the stories behind it. I'd like to hear you on this issue.

[Translation]

I would like to raise a second point. I clearly recall it being said in the House that members and their staff do not normally attend the meeting of officials who make recommendations under the Transitional Fund, but in the case of an issue of concern to the Prime Minister, his assistant did attend the meeting where recommendations were made. Did you discover this in the course of your investigation? As members, we have never been invited to those meetings.

Third, in your investigation, did you manage to determine when there were what are referred to as pockets of unemployment? Apparently, they occurred only in Liberal ridings. If that is not patronage, I do not know what is. When this was discovered, it was practically over and done with. In some regions, there were pockets of very high unemployment, but if you were not in a Liberal riding... We did not find out about this in the House, nor in members' offices. Apparently, it existed only in Moncton and Fredericton. Funny, those regions are represented by Liberal members. Is that not government patronage?

I would like your comments on these three issues. Thank you.

[English]

Ms. Maria Barrados: Mr. Chairman, I'll try to answer those questions briefly.

First, with respect to the specific project, the Scotia Rainbow file, we sampled that particular project in our audit. One of the members had asked me about that before. What we found is this had a high number of irregularities, which we state in general terms throughout the chapter. Like many of the other projects in TJF, it had payments made that were not in accordance with schedules, advances that were not paid as they should have been paid, coding errors in terms of the expenditures, no monitoring, no documentation of activity visits, no financial monitoring. The list of things we were describing in TJF projects that were a problem in how they were managed generally apply to that particular case. But we didn't single that case out because it was like the other cases that are documented in the report.

On the second question, with respect to Auberge des Gouverneurs, as to who attended the meetings, we don't have that kind of information and there's nothing I can provide the members to answer that question.

On the third issue, with respect to pockets of unemployment, we make observations in the report that this was a problem. The reason that was a problem was that was a measure and a direction that was not really reasonably easy to operationalize. So it meant a directive was given that this was to be done, and there were different practices all across the country because there was no easy way for officials to make this work and apply it. That is one of our observations. That is a big problem, and it needed to be tightened up.

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Mr. Yvon Godin: Okay.

I want to continue my question about Scotia Rainbow. Even if you didn't find any papers, or you didn't find a follow-up, did you find in there somewhere where it didn't make any sense, from $650,000 that went up to $2 million? We're talking about big bucks there. We're talking about money. We're talking about who authorized that. Who is the person who authorized that type of grant? According to the member of Parliament of that region, this never went through his desk, and was authorized. That's more than a follow-up of paper. I'm not going to call it fraud; it looks like it's not fraud. But I want to know what it is. I would like to have an explanation.

Ms. Maria Barrados: Mr. Chairman, we agree that the issues we are raising in our report are not issues of paper or follow-up of paper. When there is no monitoring, when there is no following the way payments should be made, when there is no proper coding, there is a problem with how a project is managed.

We are making those comments across the board for how TJF was managed. There are very few exceptions where there weren't difficulties with the files. I'm not sure it's appropriate to get too much into the particular case, because we found that the whole program had a problem, in its design and its implementation and management.

The Vice-Chair (Mr. Steve Mahoney): Are you finished?

Mr. Yvon Godin: I have more time?

The Vice-Chair (Mr. Steve Mahoney): You have more time.

[Translation]

Mr. Yvon Godin: I asked you a question about what I referred to as pockets of unemployment, but the answer was not clear enough for me. I will give you an example. A company transferred its operations from Hamilton, Ontario, to Brampton. Was the program set up to facilitate the transfer of jobs from one region to another or to promote the creation of new jobs? I would like to know whether you found out anything about that, because it is important.

Mr. Denis Desautels: As you say, Mr. Chairman, the whole issue of pockets of under-employment or unemployment is problematical, and we state that clearly in our report. The information used by officials to decide whether or not there was a pocket of high unemployment somewhere was not very reliable. In fact, there are no very reliable statistics on this. So it was quite arbitrary.

Second, this was not properly communicated to the general public or to members of Parliament. We also criticized the department for this. This is a problem area, and it would be useful to have a meeting specifically on this chapter. That is the type of question the committee could ask officials when they appear before it.

Mr. Yvon Godin: When jobs were transferred from Hamilton to Brampton, that was not job creation. It was a transfer of jobs. Can you tell me what you think about this?

Mr. Denis Desautels: Mr. Chairman, as I understand it, the Transitional Jobs Fund and the Canada Jobs Fund were not necessarily designed to create new jobs; they could be used to finance the transfer of jobs from one place to another. That was acceptable. That is not the only case, Mr. Chairman. We do not agree on this point, but according the department's interpretation of the program to... In a number of cases, programs that were approved were for transferring jobs from one region to another.

[English]

The Vice-Chair (Mr. Steve Mahoney): Thank you very much, Mr. Godin.

Mr. Clark.

The Right Honourable Joe Clark (Kings—Hants, PC): Thank you very much.

Mr. Desautels, let me join with other members of the committee in welcoming you and your officials here.

I'm very much interested in instances in which the system is not working and what we might do to improve it. You have focused upon issues in which due process is not followed. You've raised the growing importance of issues relating to ethics and the impact of technologies upon traditional methods of government.

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One of the consequences that worries me, as a long-time parliamentarian, is that the result of this is that so much of what goes on is beyond public scrutiny. As I read your report, it seems to me that in at least four cases the public does not know and Parliament does not know information it needs to know if it is going to exercise its judgment. One of those is the renegotiation of the Toronto airport lease, where a $185 million reduction was made available after the fact. A second was the manner in which the Parc Downsview Park Inc. crown corporation was established. Instead of going about it in the normal way for a crown corporation of that kind, which, as you've said, would be to come to Parliament, it was set up by Order in Council. It's not subject to the requirement of access to information. You make reference to the leasing of office space and the specific case of the Canada Business Service Centre in Sydney, where it appears that the specifications were changed for mysterious reasons. Also, you make reference to the general problem—not a new one, as I well know—of awarding CIDA contracts without a competitive process.

Your focus is on system. My interest is in secrecy and how we break down the secrecy. I'd like to ask a couple of specific questions about some of those matters.

First, are you and your officials satisfied with the Department of Transport's explanation of the Toronto airport lease situation?

Mr. Denis Desautels: I'll ask Mr. McLaughlin to respond to that.

Mr. Michael McLaughlin (Deputy Auditor General, Corporate Services, Office of the Auditor General of Canada): Mr. Chairman, basically we've had two problems with that particular situation. One is that an original deal was signed, and in that deal the expectation was that the Greater Toronto Airport Authority would pick up responsibility for the de-icing and the runway. Later, in a second decision, it was decided to provide up to $185 million for both of those facilities. We see that as problematic, because there isn't an analysis that tells us why that change was made. We can't see the rationale behind it. The decision was made in one instance and then changed just a few weeks later.

As well, it's a fairness issue to us. As the various airports have been transferred, the department used the principle of as is, where is. In dealing with other airport authorities, they invoked this in terms of the other airport authorities asking for different rental deals, and in the case of Toronto it wasn't an “as is, where is” condition.

Mr. Joe Clark: You're telling us that you cannot find out why the deal was changed to the tune of $185 million in the Toronto airport case. You can't find that out.

Mr. Michael McLaughlin: No.

Mr. Joe Clark: I'd like to ask about Parc Downsview Park Inc. Would it be your recommendation that it be reconstituted as a crown corporation in a normal way, by legislation rather than by Order in Council?

Mr. Denis Desautels: Mr. Chairman, I would welcome some kind of parliamentary review or approval of the whole project. That could come by way of creating a crown corporation specifically for that purpose. Here we have a very unique purpose, and whenever a crown corporation is tasked with a specific purpose, that normally goes through the approval of Parliament. So I would welcome some form of endorsement by Parliament of the whole project, whether that be through the creation of a new crown corporation or a specific vote or appropriation for that purpose. I think one or the other would work, and I would welcome that.

Mr. Joe Clark: Do you, sir, think you have enough information to know what is going on with the Downsview corporation?

Mr. Denis Desautels: Mr. Chairman, yes. The issue here is not that we don't know what's going on. We have access to the books and records of both the parent crown corporation and the subsidiary. We also have access, of course, to Department of National Defence records, which is involved with the property. So the problem for us is not access to information.

Mr. Joe Clark: Do you know why the government chose to establish the crown corporation in the manner it did, rather than in the normal manner?

• 1330

Mr. Denis Desautels: Mr. Chairman, I can't tell for sure why they followed that approach, obviously. One of the advantages of this approach from a government perspective is that it's faster and it's less trouble. I cannot comment beyond that.

Mr. Joe Clark: Governments aren't in the business of doing things for less trouble.

Could I turn to HRDC for a second? You have explicitly said that you find, and I quote, “no evidence of fraud”. Fraud is a legal term, with Criminal Code implications. Would you deem there to have been a deliberate attempt to prevent full disclosure of relevant information?

Ms. Maria Barrados: Mr. Chairman, I would have to say that's not the way I would characterize what we observed there. What we found there was such lack of regard for process and such lack of regard for proper documentation that the material wasn't there. It wasn't there because it wasn't viewed as being necessary and important. I would not put an interpretation on it that said there was a deliberate attempt not to provide information.

Mr. Joe Clark: Not viewed as being necessary and important at all levels?

Ms. Maria Barrados: I would say that as a result of our work and in the conclusion of our report we do say that the problems at HRDC were beyond HRDC, and that they involved all levels of government in the executive.

Mr. Joe Clark: I'm sorry, I meant within the department. Let me not be cute. Do you think there was a lack of intent, a lack of attention shown by deputy ministers, the minister—ministers, in the plural?

Ms. Maria Barrados: Speaking about ministers as being responsible for the administration of the department, there was not enough attention and focus put on financial management and control in that department during the 1990s.

Mr. Joe Clark: Thank you.

The Auditor General makes it a practice of presenting preliminary copies of your report to departments that are affected, and it is then part of the process that you hear back from those departments. In addition to hearing back from the departments, was there any instance in the preparation of this report in which there were representations made by either the Privy Council Office or the Prime Minister's Office?

The Vice-Chair (Mr. Steve Mahoney): Thank you, Mr. Clark. We'll get the answer and then move on.

Mr. Denis Desautels: Mr. Chairman, the discussions we had with government officials in terms of finalizing this work were done exclusively with representatives of the Department of Human Resources Development.

The Vice-Chair (Mr. Steve Mahoney): Thank you very much.

We're now into our four-minute round, with Mr. Johnston first.

Mr. Dale Johnston (Wetaskiwin, Canadian Alliance): Thank you, Mr. Chairman. I would like to defer my time to the leader of the official opposition.

The Vice-Chair (Mr. Steve Mahoney): Okay.

[Translation]

Mr. Stockwell Day: In Chapter 11, at section 11.37, Part 1, on recommendations, states that in 1996, you made a certain comment. Section 11.37 also states that you stressed the importance of effective internal audit. Now, four years later, we are still see huge problems.

[English]

I appreciate the fact, sir, that in your work you need to have some level of optimism; otherwise, it might be a depressing job. I think you do exemplify that. What does give you confidence here, after you specifically mentioned in 1996 that you insisted on the importance of these internal verifications? Yet we have a report, quite appropriately, that—I'll use the word—is an indictment. I know you can't use that word, but it is an indictment of processes. So what is your degree of confidence based on, other than human optimism, which I do appreciate?

Also, referring back to the report you read from at the start in your overall remarks, under number 14 you say “...we found no evidence of fraud on the part of HRDC officers”. Are you deliberately being careful to say just HRDC officers, and not including any elected people there? Is that a deliberate limitation in reference to what you had said earlier, that we need a code of conduct that also applies to elected people?

The Vice-Chair (Mr. Steve Mahoney): Can we try to keep both questions and answers within four minutes?

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Mr. Stockwell Day: I appreciate that. I'm just concluding here.

Also, could you explain the process...? We're unfamiliar with.... You say “no evidence of fraud”, and I appreciate that. You appear to be limiting that to officers, and yet RCMP investigations move forward into some of these areas. Is there any connection, then, between your office and the RCMP in terms of information? And have you seen an attempt by the Department of Finance...? You say they have failed to use accepted accounting practices. That is an honest statement on your part, sir, but in my view it's a huge and sweeping indictment of the Department of Finance for the nation that they are not using accepted accounting practices. Do you have confidence that they are moving aggressively to start accounting properly for taxpayer dollars?

Mr. Denis Desautels: Mr. Chairman, first of all, I hope I don't look too depressed, despite the work I do.

The Vice-Chair (Mr. Steve Mahoney): I'm sure you're not.

Mr. Denis Desautels: The first point Mr. Day raised had to do with our comments on the internal auditing. The point I would like to emphasize here is that the internal audit has done some good work. In particular, the piece of work they did that led to this whole discussion was indeed commendable. So I think I would want to make sure we're not misunderstood.

The thing I'm worried about is that given what's happened after they completed this work, I would hope there's no temptation on the part of anybody to do less internal auditing in the future. I think it's a very important function. Even though sometimes they may tell you things you don't like to hear, I think in the end it serves to improve an organization. So this is basically a wish that in this case and elsewhere in government we don't cut back on the internal auditing, that indeed we continue to maintain a healthy internal audit capability.

In terms of our comments on fraud, we have indeed restricted our specific comment to officers at HRDC because those are the people we audited. In the work we did, we looked at the files in which they were involved, so we're in a position to make that kind of comment, as opposed to anyone else not involved directly in the process. Even if we made that kind of comment, it wouldn't mean very much. I just want to make sure that if we had found evidence of fraud on anybody else's part, we would have mentioned it. But I didn't go as far as saying that because we really weren't auditing those people.

The Vice-Chair (Mr. Steve Mahoney): Thank you.

Mr. Denis Desautels: There was a final question, I believe, Mr. Chairman, on finance and the accounting issues. I think we raised that in our report. It's a bit of a technical issue. It's about netting the payments made under the GST rebate and the child tax benefit, which amount in total to close to $10 billion. So by netting you don't change the bottom line, as such, but you reduce both the gross income that you're reporting, that the government is collecting, and the gross expenditures of government. When you make comparisons and analyse trends in expenditures and revenues, it can in fact, unless you adjust for that, lead you to some wrong conclusions.

The Vice-Chair (Mr. Steve Mahoney): Thank you very much.

[Translation]

Ms. Lalonde.

Ms. Francine Lalonde (Mercier, BQ): Thank you, Mr. Chairman. I am pleased to give my time to my colleague, Benoît Sauvageau.

The Vice-Chairman (Mr. Steve Mahoney): Mr. Sauvageau.

Mr. Benoît Sauvageau: We are one big happy family, Mr. Chairman.

There is something in your answers, Mr. Desautels, that I am not sure I understood correctly. How does the Office of the Auditor General of Canada define an irregularity? You often say that there were irregularities here and there. How do you define an irregularity?

Mr. Denis Desautels: Mr. Chairman, an irregularity is a transaction, a process or actions that are not in keeping with the procedure established for this type of transaction or program. There are directives for most government activities. The amount of detail contained in the directives varies, but an irregularity is something that is not in keeping with the directives.

• 1340

Mr. Benoît Sauvageau: I see. Let us now take a look at the example of the Auberge des Gouverneurs in the Prime Minister's riding, where a $600,000 grant was given before the officials analyzed the application. Is that an irregularity or is it interference?

Mr. Denis Desautels: Announcing a contribution before the process is complete is as a rule an irregularity. We mention irregular cases, in which approvals were not based on the established procedure.

Mr. Benoît Sauvageau: I know we are all walking on eggs here. When you say that this is an irregularity “as a rule”, what do you really mean?

Mr. Denis Desautels: It actually amounts to the same thing. It is just that your question makes certain assumptions.

Mr. Benoît Sauvageau: What is your answer? No?

Mr. Denis Desautels: I think that on the strength of what we have seen...

Mr. Benoît Sauvageau: Yes.

Mr. Denis Desautels: ... it is an irregularity.

Mr. Benoît Sauvageau: All right. Thus, if a Minister such as Mr. Pettigrew wrote, before the budget was approved, to a company like Cochran Entertainment Inc. in March 1998 to announce that it was going to receive a 2.5 million dollar grant, before the analysis, would you call that interference or an irregularity?

Mr. Denis Desautels: Mr. Chairman, I have said on many occasions that the minister is entitled to make such decisions. In the case mentioned by Mr. Sauvageau, where the minister himself established and approved a mandatory process from which he departed, we say that although he did have the right to do so, it should have been done with the greatest transparency possible.

Mr. Benoît Sauvageau: In other words, if a minister establishes a code of conduct which he goes against, then it is merely an irregularity, is that correct?

Mr. Denis Desautels: In the specific case you are referring to, and on the basis of the information we received, I consider that it is in fact an irregularity.

Mr. Benoît Sauvageau: I see. You said in one of your previous answers that you audit officials rather than ministers. Is it the ethics counsellor who is supposed to look into the behaviour of ministers? Let's pick the name of a minister, say Mr. Pettigrew. I don't know why I would choose him, just a coincidence, I suppose... If this minister sets up a code of conduct and does not comply with it, it is not your mandate to audit the behaviour of ministers but rather the behaviour of public servants and senior officials, if I've understood your answer correctly, so who monitors the behaviour of ministers?

Mr. Denis Desautels: Mr. Chairman...

[English]

The Vice-Chair (Mr. Steve Mahoney): That finishes the questions. We'll just take the answer and move on. Time's up.

[Translation]

Mr. Benoît Sauvageau: I have a short conclusion.

[English]

The Vice-Chair (Mr. Steve Mahoney): Go ahead.

[Translation]

Mr. Denis Desautels: Mr. Chairman, I've been trying to say that when we audit transactions, we take a look at what is being done by managers and departmental officials. So if the minister is playing an active role in a file, it will also be part of our audit.

[English]

The Vice-Chair (Mr. Steve Mahoney): Thank you very much.

Mr. Harb.

Mr. Mac Harb (Ottawa Centre, Lib.): Thank you very much.

Mr. Desautels, I wanted to read from your report on the Department of Human Resources Development, mainly point 11.4. You say:

HRDC has corrective action planned and being implemented in response to the problems identified in its 1999 internal audit. The actions and plans also address the deficiencies we found in our audit.

In 11.5 you go on to say:

The Department has made good progress toward meeting the commitment in its Six-Point Action Plan announced in February 2000. Management is enhancing the tools and the support available to staff to improve their ability to do their jobs. Work is also proceeding on additional initiatives that expand or complement the original action plan.

My question to you, sir, is twofold. First, do you agree with those comments in your report?

Voices: Oh, oh.

A voice: I would hope so.

Mr. Denis Desautels: Mr. Chairman, this is my report. I stand by my report.

• 1345

Mr. Mac Harb: The second thing I want to ask you is if you were ever consulted by Human Resources Development Canada on their plan, and whether it was sufficient to meet your satisfaction in terms of the six-point plan. Also, on top of this, I want to find out from you whether you have anything else to add to the Department of Human Resources Development plan of action.

Mr. Denis Desautels: Mr. Chairman, I can tell the committee that we were consulted by HRDC when they developed their action plan, and their action plan as it stands indeed reflects some suggestions we made to the department in order to make it more complete. I also have to say that an action plan was made public or tabled in the House early in the year, and during the year there were further refinements to the plan. So it has been evolving. We were generally comfortable with the initial plan in terms of solving the more pressing problems, and later on in the year improvements were made to that.

Mr. Mac Harb: Thank you.

You said in your report that there has been no malfeasance by officials. What do you mean by that?

Mr. Denis Desautels: We did not find evidence of fraud or decisions being made by public servants to line their own pockets, to be blunt. I think the decisions that were made were in reaction to what they thought they were told to do—in other words, put client service first and make sure the requests for funds are processed quickly. There was a general view in the department that we can take care of the paperwork later, but the important thing is to get the payments out fast. The problems were more of that nature. But however bad this was, it did not result in any personal gain, as far as we know, on behalf of the officials of HRDC.

Mr. Mac Harb: My final question, Mr. Auditor General, is I wanted to ask you whether you would admit that all levels of government face administrative problems. For example, I read in The Globe and Mail this morning that after having already poured $441 million into the operation of the Swan Hills waste treatment facility, the Alberta government—and I wish my colleague Mr. Day were here to hear this—is being forced to take over this operation after its private operators pull out. I want to ask the Auditor General if this does not show that all governments can face serious administrative challenges and problems, no matter what their political stripes.

Mr. Denis Desautels: Mr. Chairman, on the one hand, it is true that large governments and small ones will always run into a problem of one kind or another in administering public spending programs. With the Government of Canada being the size it is, it's not surprising that as your auditor we would find a number of issues to bring to your attention.

On the other hand, as I said to the committee earlier, the situation at HRDC in 1999 and earlier was worse than what we had found in similar programs in other departments.

The Vice-Chair (Mr. Steve Mahoney): Thank you.

I understand the time is going to be split between Mr. Mayfield and Mr. Duncan, four minutes. Mr. Mayfield.

Mr. Philip Mayfield (Cariboo—Chilcotin, Canadian Alliance): Thank you, Mr. Chairman.

Mr. Desautels, in your report you talk about the lack of following procedures in HRDC, just to be clear, and you mention problems of application, tracking, and following up results. The problem was described to me rather graphically by an HRDC official some time ago when we were in the midst of trying to sort out what happened, and his explanation of what happened was something like this—using his language. He said the problem was we couldn't shovel money out the door fast enough, so we were given instructions to set aside the Financial Administration Act and the bulletins and regulations with it, and we were given in place of that a videotape and a thin three-ring binder instructing us on how to administer these programs.

• 1350

I'm wondering, sir, if you found that kind of a lapse in your audit, have you found that the Financial Administration Act is an important part of administering these funds? Has that been brought back into play? Would you characterize this as an accurate way of describing how the government dealt with the problem of getting the money out faster?

Ms. Maria Barrados: Mr. Chairman, we note in the report that during the nineties there was an effort to put greater emphasis on service, to move away from detailed controls and detailed directions, and there was an initiative the department undertook called “Breaking the Barriers”. It is our view that that conveyed the wrong message to many officials because a lot of the detailed instructions were taken away and generalities were put in place. Subsequently, there were changeovers and downsizing and people didn't know what they were required to do.

With respect to your question on the FAA, yes, that is a very important part of management, an essential part of management, for public servants. As we note in this report, we found cases of non-compliance with the requirements of the FAA.

The Vice-Chair (Mr. Steve Mahoney): Mr. Duncan, there's a minute and a half left.

Mr. John Duncan (Vancouver Island North, Canadian Alliance): Thank you, Mr. Chairman.

My understanding is that on the ethics and values part of your report you followed the Tait report from 1996 as a bit of a pattern. The two major things that fall out of that report are: “...public servants continue to believe that senior managers do not lead by example”, and secondly, “...unless recourse mechanisms were created, many public servants would consider all the talk about values and ethics as `so much hot air.”'

I guess my question is this. You've looked at a major breakdown, widespread problems, and you must have thought about recourse mechanisms in the process of doing that. What suggestions would you have in terms of putting in sensible, efficient recourse mechanisms that obviously we don't currently have?

Mr. Denis Desautels: Mr. Chairman, as a first part of my answer to Mr. Duncan, when we talk about ethics and values, sometimes we tend to consider those two words as synonyms. But they are not really. I say this because if you then apply these words to the HRDC situation...I said very clearly a moment ago that the problem with HRDC is not a problem of people lining their pockets. It was not really an ethical issue; it was more a values issue, where there was an imbalance between client service and respecting the Financial Administration Act and other concerns like that. I just want to make that point quite clear.

Our work on ethics and values has demonstrated—in fact it quotes other research that says there is a credibility gap in organizations between the rank and file and how they perceive their leaders to be behaving, and that has to be closed. One way of closing that is to pursue, as I indicated, the putting into place of a proper and comprehensive ethics framework and a proper values framework that everybody would agree to. I think that would help close this credibility gap.

In terms of recourse mechanisms, we are suggesting that as part of this framework there be a way for public servants who disagree with certain decisions or certain attitudes to voice their concerns, hopefully internally, through proper, independent arbiters and not be left with only one ultimate recourse of going public under some whistle-blower legislation. So we think there's a need to have in place structured mechanisms that will nip some of these problems in the bud before they become too large and before we force people to take this extraordinary action. I think there can be a lot of interesting discussions, but whistle-blower legislation, as some people have called it, may be needed. I think before that you also need these other mechanisms, which will enable problems to be solved much sooner.

• 1355

The Vice-Chair (Mr. Steve Mahoney): Thank you very much.

We'll go to Ms. Phinney now.

Ms. Beth Phinney: Thank you, Mr. Chair. I would like to thank the Auditor General for coming. As usual, his reports are very helpful.

I have four short questions, if I could have four short answers.

The Alliance and others keep saying that your study into HRDC proves that $3 billion was wasted and squandered. Is this statement correct?

Ms. Maria Barrados: Mr. Chairman, our audit scope does not deal with $3 billion. Our audit scope deals with a sample of programs that was about $500 million. We are showing serious problems in the management of that $500 million.

Ms. Beth Phinney: What was the value of the mismanagement or the loss of funds out of that $500 million?

Ms. Maria Barrados: Mr. Chairman, I can't put an exact number on it, because if I start adding up individual things, that covers the whole amount. There were widespread difficulties throughout the programs we audited. So it's hard to say exactly what kinds of proportions we have on there.

Ms. Beth Phinney: On overpayments, doesn't HRDC follow the guidelines from Treasury Board on how these are determined?

Ms. Maria Barrados: As we note in the report, there is a definition of overpayment that says that the department declares an overpayment when they feel they can recover the payment from the recipient. In our audit we found a number of cases that we felt were highly irregular and were not proper payments: payments for ineligible expenses, payments beyond the funding period, payments for conditions and circumstances that were not provided for. If HRDC officials agreed to those payments, even though they weren't formal amendments to the contract, it is not possible for HRDC to recover them. So HRDC was advised from their lawyers in the policy not to establish them as overpayments because they could not be recovered.

From our point of view, any of these payments that are for ineligible expenses beyond the funding period for things that are not provided for are irregular payments.

Ms. Beth Phinney: Were they following the guidelines of the Treasury Board? That's what I'm asking.

Ms. Maria Barrados: On the point about are they established in the overpayments the way they are directed, that is correct; they are doing that.

Ms. Beth Phinney: In your opinion, then, and the opinion of the Auditor General, the guidelines of the Treasury Board should be changed. If you don't agree with the way they did it, then....

Ms. Maria Barrados: We try to make this distinction: our point is that in only speaking of the overpayments—and that is the amount of money you can recover—you are not telling the full story of what went on here. What went on is there were a lot of payments that shouldn't have been made, but if officials do not go through the process properly they can't recover it.

Ms. Beth Phinney: Okay, thank you.

The Vice-Chair (Mr. Steve Mahoney): Thank you.

We'll go to Mr. Shepherd.

Mr. Alex Shepherd (Durham, Lib.): Thank you, Mr. Chairman.

Thank you, Mr. Desautels, for appearing. This is the second time this week that we've had this conversation.

There's a comment by Mr. Day, and it's too bad he couldn't take the time to stay, which is just sort of hanging in the air for me, I guess, as an accountant myself. He made a statement that the financial reporting of the Government of Canada by the finance department does not conform with generally accepted accounting principles. Is that correct?

Mr. Denis Desautels: Mr. Chairman, we said that we don't agree with the way the Department of Finance presents certain expenditures made under two programs. This is not strictly covered under what is called generally accepted accounting principles. There are no generally accepted accounting principles that cover specifically that kind of situation.

Mr. Alex Shepherd: The point is that the comment by Mr. Day that the Government of Canada and the finance department do not follow generally accepted accounting principles is not true, is it?

Mr. Denis Desautels: Mr. Chairman, we don't like the way the Department of Finance has been representing. This isn't a new problem. This is something that's been going on for the last five or six years, particularly since the child tax benefit has taken on the importance it has. We don't like it, but it's not contrary to the specific dictates of generally accepted accounting principles. I don't think that's good enough. I think that should be changed, and I hope the finance department will eventually change it.

• 1400

Mr. Alex Shepherd: Okay, I'm going to try this one more time.

You signed off on the financial statements of the Government of Canada this year, saying that they conform to generally accepting accounting principles, did you not?

Mr. Denis Desautels: Mr. Chairman, yes, we did give a clean—

Mr. Alex Shepherd: Therefore, by definition, isn't Mr. Day's statement incorrect?

Mr. Denis Desautels: I would have to check exactly the words used by Mr. Day, Mr. Chairman. I'm repeating that we accepted the presentation of the government up to this point in time, but we are encouraging government to change that, because we think that overall it's distorting some of the budgetary presentations that are made—

Mr. Alex Shepherd: It seems to me that Mr. Day is indirectly challenging your audit opinion on your financial statements. Either he's wrong or you're wrong. Do the financial statements of Canada conform to generally accepted accounting principles, yes or no?

Mr. Denis Desautels: Mr. Chairman, we've given a clean opinion on the financial statements of Canada.

Mr. Alex Shepherd: Okay, thank you.

Getting on to overpayments—

The Vice-Chair (Mr. Steve Mahoney): You have one minute.

Mr. Alex Shepherd: I'm going to change my question, if that's the case.

In reading the conclusion, if we can stand back from this whole discussion a little bit and ask why we're having it today, I think we would have to say that there was significant downsizing in all of these departments due to program review and that we lost a lot of people who had financial expertise. I think that's what your conclusion is saying, and that these people have not been easily or quickly replaced. And that's a real challenge for government: that through comptrollership, through the Treasury Board and so forth, and through training public servants to be more attuned to this, we have to move faster. I believe you're also saying that the government has recognized that and is working toward those goals. Is that not a fair statement?

Mr. Denis Desautels: Mr. Chairman, I could offer comments as to why this situation occurred.

To answer the last part of Mr. Shepherd's question first, yes, we did say that the government is acting to correct the problems, and we're in agreement with the action plan they presented.

On the broader question of why, over the 1990s this department went through a number of reorganizations and changes. It became a huge department after the 1993 reorganization, and soon after that there was a downsizing of the department and it lost a lot of its corporate memory and expertise. It was asked in fact to carry out certain programs, such as the Transitional Jobs Fund, very quickly and without being given funds to administer the programs properly. All of these factors contributed to the situation we know today. But I would say that over and above that, what was even more serious is that they lost the balance between fast delivery of service to the clients and respecting the fundamentals of sound financial management and respecting the Financial Administration Act.

The Vice-Chair (Mr. Steve Mahoney): Thank you.

For committee members' information, we've gone through two rounds, and we have a couple of government members who have not had a chance to question. At that point everyone would have had their opportunity according to the seats they have on this committee.

My ruling would be that if there is a desire to move to a third round I'm going to need a motion to extend the time. Otherwise, we'll go to Mr. Easter next and then Mr. Richardson and then I think we're finished.

An hon. member: I would so move.

The Vice-Chair (Mr. Steve Mahoney): Thank you. I don't really need a motion to do that, but that's fine, thanks.

Mr. Wayne Easter (Malpeque, Lib.): Thank you, Mr. Chairman, and welcome, Mr. Desautels.

We've had several months of hype and overblown criticism of some of the problems surrounding HRDC, that's true. There needs to be improvement made, and I believe the government is moving in that direction. But missing from this equation are the people who are affected. I'm wondering if you have talked to any of the people in those high-unemployment regions in terms of how they've been affected by CJF or TJF.

• 1405

Mr. Auditor General, if I could put it another way, the difficulty in terms of dealing with just specific numbers is that they're cold, calculating, and uncaring. I might say that's a little like the Canadian Alliance's attitude toward Atlantic Canada and the unemployed: cold, calculating, and uncaring.

An hon. member: Cold-blooded.

Mr. Wayne Easter: Can you say anything beyond these numbers in this report? How do the results match up based on the investment? Were jobs created as a result of the TJF? At what cost were those jobs created? Was there greater economic activity than otherwise would have been the case?

I was certainly involved in the original discussions on CJF and TJF, and our concern was that having to make the changes in EI that we did, we needed to ensure there was economic development. I want to know if there's anything on that side that you looked at that's positive.

Mr. Denis Desautels: I'll ask Ms. Barrados to answer that.

Ms. Maria Barrados: Mr. Chairman, in terms of how we conducted the audit, our auditors went to all the regions across the country, and they did spend time talking to HRDC people and the people in those areas.

In terms of the kinds of effects and the results from TJF and CJF specifically, we spent some time looking at TJF, and we had difficulty supporting the kinds of claims that were made for TJF. There were a number of problems. There was not a very good systematic way of collecting the kinds and numbers of jobs that were created as part of managing those projects. In addition to that, when we looked at the kinds of job claims and new jobs that were made, we could not support those claims. We explained the reasons in the report.

Mr. Chairman, the member asked if there was any increase in economic activity and if there were any jobs created. Yes, there were some jobs created, and yes, there was some increase in economic activity. But we cannot support or find evidence for the kinds of claims for the amounts that were made. Hence, it becomes very difficult to then do an equation in terms of what you got for the money.

The Vice-Chair (Mr. Steve Mahoney): You have one minute left.

Mr. Wayne Easter: Thank you, Mr. Chairman.

So there was indeed some positive impact as a result of these investments in high-unemployment areas. We're clear on that.

In terms of getting to a better evaluation of that, you do mention in your report that the department is moving forward with an action plan. Do you anticipate that action plan being able to show us the results in the future? Is it moving in the right direction?

Ms. Maria Barrados: Mr. Chairman, with regard to TJF and CJF, those programs are no longer in the department. TJF is over, and CJF has been ended.

As part of the plans the department has—and this goes beyond the six-point action plan—there is a management study that is going to be looking at program objectives and the kinds of results to be expected from all the programs.

The Vice-Chair (Mr. Steve Mahoney): Thank you, Mr. Easter.

Mr. Richardson, the final questioner.

Mr. John Richardson (Perth—Middlesex, Lib.): Thanks very much, Mr. Chairman. I'll try to be brief.

This is addressed to the Auditor General. I just wanted to stay in the area of the assessment of financial management capabilities.

I think it was about a month ago, or maybe a little longer, when I attended a meeting you held with a number of your senior officials, and I was impressed by the broadening out on both a horizontal and vertical level on what I call in-house professional development of the people working for you. I can't think of a better methodology for training your people where they're all doing the same things and they know them well. I just wanted to ask, is this going to be a continuing in-house educational program as I see now working so well, or is it just bringing everyone up to snuff?

• 1410

Mr. Denis Desautels: Mr. Chairman, we have been focusing a lot in the last three or four years on what we've called financial management capability. Our objective is to encourage much better financial management across government. This is why we've invested a lot of effort in developing a model that departments themselves can use to assess where they are on the scale of financial management capability. We've had a good buy-in, we think, with this tool, and I think as we progress each year there will be more and more departments using that kind of tool, either this one or a similar one. I would hope that within a short number of years we could say that there has finally been significant improvement in the quality of financial management across government. But it will require leadership and dedication.

Mr. John Richardson: Thank you very much.

The Vice-Chair (Mr. Steve Mahoney): Thank you.

If there are no more questioners.... Do you have a point, Mr. Sauvageau?

[Translation]

Mr. Benoît Sauvageau: Yes. I suppose you will be tabling a motion so that we can extend our proceedings somewhat, and I am making a presumption about the position of my colleagues opposite. In view of the fact that they got lost yesterday, I am sure that they will not wish to repeat the experience, and in order to make up for this they will give us a few extra minutes so we can continue to question Mr. Desautels. If this were not the case, you can understand that we would be very...

[English]

The Vice-Chair (Mr. Steve Mahoney): I'm prepared to entertain a compromise. You had asked for one question, and the Alliance has asked for one question. If members agree, we'll allow those questions.

Mr. Clark.

Mr. Joe Clark: I think Mr. Godin and myself will also welcome the opportunity for further questions.

The Vice-Chair (Mr. Steve Mahoney): One question each. Is that agreed, Mr. Clark and Mr. Godin?

[Translation]

Mr. Joe Clark: Yes.

[English]

The Vice-Chair (Mr. Steve Mahoney): We'll go with one question, and we'll start with the Canadian Alliance. Are they not ready? Shall we move on?

Mr. John Duncan: We're ready.

The Vice-Chair (Mr. Steve Mahoney): Okay, go ahead, then. One question, please, and we particularly hope that it's not an eight-minute question.

Mr. Dale Johnston: It won't be, Mr. Chairman. I'm known for my brevity.

The Vice-Chair (Mr. Steve Mahoney): Good man.

Mr. Dale Johnston: I would like to point out to the Auditor General, with all due respect, that he did not finish answering the question put by my leader as to the ongoing RCMP investigations and sharing information with the Auditor General and HRDC.

I'd also like him to comment on the question raised by Mr. Shepherd regarding generally accepted accounting principles. It is my understanding that in the 1998 audit the Auditor General did not sign off on the report. Perhaps he could clarify that. I was under the impression that generally accepted accounting principles hadn't been followed.

Mr. Denis Desautels: Mr. Chairman, I apologize if I missed that question that Mr. Day asked earlier. You'll have to excuse me, I'm receiving more than my fair share of questions today.

In terms of ongoing RCMP investigations, when we knew that a file that we would normally have picked was under RCMP investigation, we excluded it from our sample. So we have not included in our sample anything that we knew the RCMP was investigating. If we had found cases in our own sample that we felt contained illegal or criminal actions, we would have referred them to the RCMP. That's for the first question.

In terms of accounting principles, I said that we did give the government an unqualified audit opinion for the last fiscal year and that we had also given an unqualified audit opinion for the previous fiscal year, that is, for 1998-99 and 1999-2000. In the year previous to that, as well as in the year before, we had qualified the financial statements because we had disagreed with the finance department on a specific item. This was the booking of expenditures in the improper year. We've had debates about that, and everybody knows what this is all about.

I hope this clarifies the situation.

The Vice-Chair (Mr. Steve Mahoney): Thank you very much.

[Translation]

Mr. Sauvageau.

• 1415

Mr. Benoît Sauvageau: Mr. Desautels, earlier on you enlightened me about the kind of vocabulary you use or that we should use. You said that a minister or an official would be accused of fraud if he put money in his own pocket. In such a case, you would demand an investigation. Let me take an example that may seem hypothetical but may also have some resemblance to reality. If it were not a case of fraud, it might be something that you would describe as an irregularity.

Let's take a department like HRDC, whose minister would go under the name of Pierre Pettigrew, and let's assume that this minister meets a businessman who happens to be a friend of the Prime Minister and whose name is Claude Gauthier. Let's say that this man is the owner of Transelec and the department awards him a 6.3 million-dollar grant. It would not be fraud but would it be an irregularity? Is this the kind of thing you had in mind when you talked about irregularities?

Mr. Denis Desautels: Mr. Chairman, I think that the question is hypothetical but at the same time, specific reference is made to certain persons, I think that such a question deserves discussion once all the facts have been set out. I would prefer not to answer the question as it was put this morning.

[English]

The Vice-Chair (Mr. Steve Mahoney): Thank you very much, Monsieur Sauvageau.

Monsieur Godin.

[Translation]

Mr. Yvon Godin: Mr. Desautels, my question deals with your investigation. Have we been able to establish the relationship between the people in the Human Resources Development Department and their boss, who in the final analysis is the minister? Were you able to determine the relationship between these two parties to assess the responsibility of the minister or certain officials with decision-making power in the handling of particular files? Were you able to establish this relationship and find out whether, for example, there was any pressure on the part of certain officials?

Let me give you an example. I'm not saying that this is what happened but let's suppose there is a projet for a particular region and someone wants to get it. Let's assume that the official makes it known that he does not want this person to be recommended for the project but that his boss has a different view and decides to make such a recommendation. This is just an example.

[English]

Ms. Maria Barrados: The department is a decentralized department, and for the programs we looked at there were two that were delivered in the regions and two that were delivered in headquarters. Obviously you have different relationships between the senior management and the regional management, depending upon the nature of the program. The department recognizes that these linkages weren't sufficiently strong, and we have identified a number of places in the audit report where there are problems. They have set about putting in the frameworks and strengthening the accountability frameworks and doing reorganization to address those issues.

The Vice-Chair (Mr. Steve Mahoney): Thank you very much.

Mr. Clark.

Mr. Joe Clark: Thank you, Mr. Chairman.

There are lots of questions. Maybe the committee should meet again on Monday. Mr. Desautels is ready to do that, and certainly the public interest would be served by doing that.

You said, sir, in answer to Mr. Harb that when the plan of action of HRDC was put in place, certain of your suggestions were accepted. I gather that means that certain of your suggestions were not accepted. I wonder if you could give us an indication of the suggestions you made as to the plan of action that should have been followed by HRDC, the major suggestions you made that were not accepted by them.

Mr. Denis Desautels: Mr. Chairman, I welcome the opportunity to clarify what I said. When I said that certain changes were made as a result of our suggestions, in my recollection in fact all of the recommendations we made to the department to improve their action plan were accepted. I must say that they were very receptive to the suggestions we made.

The Vice-Chair (Mr. Steve Mahoney): Thank you very much.

Do I have one final question on the government side? Mr. Harb.

Mr. Mac Harb: I am grateful to the Right Honourable Mr. Clark that he has been here. I would say that unlike what we are seeing on the Canadian Alliance side, dealing with fictions.... The real motive here in fact is not the issue at hand, because the issue at hand we have dealt with already and the Auditor General has tabled his report. He just said to the Right Honourable Mr. Clark that yes, in fact all of the recommendations that were in his report were accepted by the department, and that is very good. They were very receptive.

• 1420

I think the issue here is an issue of one party that is trying to dismantle what we really know as social programs in Canada; trying to take away from the poor in order to feed on the habit of the rich; trying to dismantle the Canadian institution as we know it; trying to gut our social programs as we know them; trying to dismantle the institution as we know it; trying to get one part of the nation against another one.

The Vice-Chair (Mr. Steve Mahoney): Do you have a question?

Mr. Mac Harb: I'm moving on with my preamble to say to the Auditor General: Is it your intention to come back to this committee with a follow-up report, say within the next month, in order to give us an idea about the progress the Department of Human Resources Development has made in response to your report?

Mr. Denis Desautels: Mr. Chairman, our practice has been, as you know, to do a follow-up of all of our audits approximately two years after the initial reporting. I realize that in this situation we're dealing with a fairly unusual set of circumstances. If the public accounts committee wishes us to move up the timing of our follow-up of this particular audit, we would oblige. I believe that would be possible. I think it would be quite timely to do this, instead of two years from now, let's say in about a year from now. I think that would provide useful information to the committee and to the rest of Parliament.

The Vice-Chair (Mr. Steve Mahoney): Mr. Desautels, on behalf of all members of the committee, I want to thank you and your staff for your thoroughness and for the terrific job you do on behalf of all the taxpayers of Canada and for being so forthright with us today. Thank you.

Voices: Hear, hear.

The Vice-Chair (Mr. Steve Mahoney): Just before we adjourn, I might just tell the committee that we have an order adopted by the subcommittee on Thursday, October 19. I would like to just read it for the record so we do not have to reconstitute:

That the Chair of the Sub-Committee on International Financial Reporting Guidelines and Standards for the Public Sector report to the Standing Committee on Public Accounts that the Sub-Committee adopted the Draft Report dated October 16, 2000, as amended, and that the Sub-Committee recommends that the Report, as amended, be considered by the Standing Committee at a subsequent meeting during this Parliament or at the beginning of the next Parliament.

This meeting stands adjourned.